Dividend Income 3160 Income Tax Preparation & Law 2021-2022


Income Tax 2021 2022 dividend income, get ready to get the refunds to that Max dive in into income tax 2021 2022. Here we are in our income tax formula focusing in on the first line, that income line, it’s still looking deceptively simple as just one line.


But remember, we can expand on it thinking of this as the summary sheet, kind of like the 1040. In summary, other schedules feeding into it when we’re looking at the top line, other schedules could feed into it like schedule one, Schedule C, Schedule E, Schedule D, for example,



which we’ll talk about in the future. But now we’re looking at the dividends. Dividends is usually something that you’re going to get a statement from a 1099 div. And it usually is fairly straightforward, but you have some interesting components with it,



including whether or not you’re gonna have a different tax rate with regards to the dividends, we can have two different basic type of dividends. And there’s often arguments as to double taxation with regards to dividends.



So these are all things that you’re likely to get questions about from time to time by clients. So it’s good to have an understanding of what dividends are, what double taxation is why there’s an argument as to why dividends might be taxed at different rates, rather than the simple or standard progressive tax system, for example.



So to get an idea of that note, if you’re most investors, you might be a passive investor, for example, just with index funds, possibly, or mutual funds or something like that, that you’re investing in. The other thing that confuses this, by the way, also is that if you have other investments in the umbrella of like a 401 K plan or an IRA,



then you might not be paying taxes on it, because it’s under the umbrella, even when you get the distribution of the dividends. And so that’s another thing that can confuse people, they might say,



Hey, I’ve got all this money, and stocks and bonds, I’m getting dividends, but I didn’t get a 1099 for it. Well, that’s because possibly it’s under the umbrella of of the retirement plan. So these are all questions that could basically come up.



So the general idea Corporation earns money, the corporation is is unique in terms of a business format, in as opposed to like a partnership or sole proprietor and that it’s its own separate legal entity,



and it has attributes then, for an entity like a human being, and in essence, it pays taxes in other words, so the government is actually getting some of the revenue from the corporation.



So they’re already getting some of that money there. And then this is representing the money that is left. And then if the owner if they want to distribute money to the owner, which is like us.



And note, we often don’t think of ourselves possibly as an owner, we think of ourselves often as an investor, if we’re passive investors, because we own a very little amount, therefore, we don’t have a lot of control. But the stockholders are the owners, right?



If you owned a lot of stock, then you’d have control over voting rights, and so on, and so forth. So when anyways, the money is then going to go to the owner in the form of dividends, and the government is going to get a piece of that as well, as it goes to the dividends. That’s what we call the double taxation.



That’s where double taxation comes into play, because we’re talking about income taxes, which got taxed at the corporate level, and then it got taxed again, at the distribution level. Now, if you were talking about like a sole proprietor, for example,



or other pass through type of entities, that doesn’t happen, because the distribution isn’t taxed, it’s only going to all the all, the revenue, unlike a sole proprietorship, is taxed on your schedule C flows through to the first page of the 1040.



And you just get taxed one time, you don’t get taxed by drawing the money out of your of like your sole proprietorship, or your partnership, for example, and the flow through entities which are different in that respect, as well.



And they’re trying to avoid this kind of double taxation. So because of this double taxation, you get all these different kinds of laws, people arguing that we shouldn’t have the taxes on the dividends, or there’s arguments to the dividends of passive income. And because it’s a passive income, it should be taxed.



And then of course, there’s arguments will people that have own stocks or rich people, even though that’s not totally true, because like many people have access to stocks these days and whatnot, so, but that you’d say that and that means that we should increase the tax on investments to increase it.



And obviously, the counter argument with that firm would be, well, that’s crazy, because you’re gonna kill, we want the economy to grow. And the way to grow the economy is to have capital, go into people that need it, the businesses that are making stuff and whatnot. So there’s all these arguments around the dividends.



And that’s why you might see different kinds of tax taxation for it. So the reporting of it is going to be fairly straightforward because you should get a 1099 div. If it’s a you know, a normal publicly traded company, you won’t get that 1099 div. If



if or you could have some differences if it’s under the umbrella of something like an IRA or retirement plan, which you would have to explain and in the tax software will hopefully apply the proper tax for you if there’s any kind of differentiation in the tax calculation.



So here’s the little bit of money there. We get after the double taxation and our slides. So types of dividends, then we have ordinary dividends and qualified dividends. So these are going to be the two types of dividends.



And they’re going to be significant because they could lead to different tech tax implications. Here we are in our 1099 D I V, this is what you’ll typically get from your financial institution to help you out to be recording your dividends.



Now, note that it might not look exactly like this in format might not have all the boxes, but it will typically have the numbers involved so that you can look them up in the instructions, and you’ve got the form name here. So let’s just go through it real quick. And we’ve got the payers name and address the payers, ti n, the recipients, ti n, and so on.



And then the box, one A and one B, these are the biggest boxes, the first one, one a total ordinary dividends, and then one B qualified dividends. So if you saw a number in both of these boxes, we’re not adding them together to get the total dividends, we’re saying the first box one eight is kind of like that total dividends. And then one, B is of the dividends in one A,



these are the qualified dividends, which could have usually more favorable tax treatment. And then all the boxes below are far less common to see but you could see some of them so to a total capital gain distribution.



So this would mean that you got a distribution that that should be reported as a capital gain, which might be reported on a Schedule D.



This often confuses people, because when you’re trying to check what is happening, say like in your Excel worksheet, for example, this will be another sheet, it’ll be like on the Schedule D oftentimes,



and so you got to kind of note that because this comes up fairly fairly often. Note that if you’re looking at dividends, usually you’re thinking about retained earnings, the company has generated revenue,



and is distributing their earnings that they have gotten back out. But if they’re dipping in past the retained earnings going into the investments for like when they sold the stock into that component of their of their revenue, then that could be treated differently possibly as like a capital gain.



And then you’ve got some special conditions and recap section 1250 gain. Now oftentimes, if this comes up, you’re going to want to look at the instructions.



And oftentimes your tax software will help you with these other kinds of things which are a bit more unusual. But this instructions can help you to guide you on them, as well as the the tax software and the instructions.



So section 1202 Similar situation, collectibles 28% gain in the case of collectibles, that doesn’t happen quite as often even as the section 1250.



In my experience. Section Eight depends who your clients are, of course, however, section 897 ordinary dividends section 897 capital gain,



dividend distribution, federal income tax withheld. That means that you could have withholdings because you’re saying hey look, I got a dividend. That’s going to increase my income. I might have withholdings on it.



However, you don’t normally have oftentimes withholdings here because unless maybe they’re in retirement or something like that, because most of the time, people might then adjust their withholdings with like their W two withholdings or possibly they’ll make quarterly payments, if that’s what they’re doing.



But you can imagine a situation where you’re going to take the withholdings out here on the on the dividend, section 199 A dividends,



investment expenses foreign pay tax, if that would be applicable foreign country or US possession cash liquidation distributions.



So now you’re talking about the liquidation of the company, non cash liquidation distributions, so liquidation, meaning the company’s liquidating or closing so that you could have different tax treatments than like a normal dividend type of distribution.



So and this is same thing but a non cash exit exempt interest, dividends, and specified private activity, bond interest, dividends, and then you got the state information on down below.



So if you have any of those questions on any of those boxes, you can go to the instructions. If you don’t get the instructions with the actual form, then you can always look them up on the IRS website because the instructions will be standardized.



The dividends if you if you take a look at the first page of the tax return, we’ve got the qualified dip portion here, and then the ordinary dividends on the right. So if I was to see this on the 1099 dividend, this would be the first box for the dividends, the ordinary dividends and then the second would be this 1000.



This would be one a the second box one a one b Right. So these are the this is going to be the qualified portion of the dividends. So if I was to look in here did total ordinary dividends and in the qualified dividends, so I wouldn’t be saying in this case that I had 4500 dividends



No, I’m saying that I had 3000 dividends and of those 3000 1500 of them are qualified. This 3000 Then is what’s been included as we go into the adjusted gross income.



Now it’s gonna get confusing here with when you get to the tax calcul Lesson because you might ask, someone might ask, well, what’s the point of breaking these out? Well, there might be different tax calculations on it. Well,



how does that work? Because we’re using a progressive tax system that already has multiple tax brackets in there. Well, that’s true. But now we’re adding more tax components based on the type of income that is included, is it going to be taxed at ordinary income, or is it going to be taxed at a special type of rates, ordinary income being the normal progressive tax rates,



and then if your income goes over a certain threshold, we’ve got scheduled b, which we saw also have the interest involved has the dividends as well.



So if your interest in ordinary dividends are above a threshold, then you’re going to have to include or add on the Schedule B, which will feed into that page one, we’ll see more of that when we get to the the, the software example, qualified dividends, enter your total qualified dividends.



On line three a qualified dividends are also included in the ordinary dividend total required to be shown on line three B. So qualified dividends are eligible for a lower tax rate than other ordinary income. So that’s going to be the death benefit. The qualified means that it’s going to get a beneficial tax treatment,



which you can’t really see on the tax return because it’s going to be it’s going to be combined in In other words, the actual benefit that you get is going to be combined in with a tax calculation, which usually comes from the tables which we typically rely on the software to do. Generally, these dividends are shown in box one B of forms 1099, D IV,



see publication 550, you can find that on the IRS website for the for the definition of qualified dividends, if you receive dividends not reported on Form 1099 D IV, in general, there are three things that will help to determine whether a dividend is qualified or not. And these are going to be useful to be able to discuss this with the client,



because the client is going to be able to see that, okay, these are the qualified dividends that are being reported. These are the items that are non qualified, given the 1099 D IV,



but they might ask you why a dividend would be qualified or not. And for planning purposes, in terms of investing, that could be something irrelevant when you’re looking out into the future.



So this is the main one, number one, it is paid by a US corporation or qualified foreign entity. So the incentive there being that of course, the United States would like to incentivize the capital investment in United States corporations possibly then giving a tax benefit when doing so to it is actually a dividend in the eyes of the IRS.



So in other words, we looked at some instances where you get a distribution, for example, for a corporation, which isn’t qualified as a dividend, maybe it’s some other kind of distribution, maybe they’re not distributing the retained earnings, but



But it’s dipping into, like capital gains or something like that. And then three, you held the underlying security for long enough, this is the one that gets a little bit confusing.



So if you had questions on this one, you could go into the instructions and dig into it in a little bit more detail. But for most passive investors, this one will be you know, they’ll pass this one generally.



And you can basically see that what is happening in terms of just pulling the information off of the 10, nine, nine D IV. But if you’re talking of active investors that aren’t so much of as passive investors, they might have to look at these kinds of rules a little bit more closely.



And you can look at the instructions related to them, you held the underlying security for long enough, the definition of enough gets a little tricky. But typically, if you own the security for more than 60 days during the 121 day period,



that began 60 days before the ex dividend date, that is the day vive when you must own the stock to receive the dividend, the dividend is usually qualified. So that gets a little technical on when the dates are located.



Note that when you’re talking about dividends, it’s confusing when the when the dividend actually goes out, because you have to determine who’s going to get the dividend for the stocks that are trading all the time.



And so those that’s why it gets a little confusing with the dates, but there’s going to be a favorable tax treatment as we took a look at so the tax filing status, you could have a 0%,



a 15% and a 20% on the qualified dividends. And you’ve got then the ranges for the single married filing jointly married filing separate and the head of households have the filing statuses.



So in other words, basically, the ordinary income rates will will have a progressive tax rate that we have seen, which will usually be dependent on the software to calculate and then based on where you fall,



you will typically have if qualifying dividends have some beneficial rate that will be lower than at least your marginal tax rate on the ordinary income and that’s going to be the benefit of having this item.



So that adds another added level of difficulty to actually do the calculations which we’re typically dependent on the software to do which will be applying the progressive tax systems and then pull out the income that was that was related to dividend income or qualified dividend and then determined the separate tables which is still kind of a tiered system. So you can sort of see it as a whole nother kind of progressive tax set of tables that and fly out and apply have the proper income related to them. Non dividend distributions,



some distributions are a return of your cost or other basis, they won’t be taxed until you recover your cost or other bases, you must reduce your cost or other bases by these distributions. After you get back all your costs or other bases.



You must report these distributions as capital gains on form 8949. So in other words, if you get a distribution and it’s not coming out of earnings of the corporation,



then then it’s basically going to be recovering your cost. And you would think that you would be treating it more like a sale kind of thing, possibly something that would be a capital gain, that would be going on the Schedule D instead of like a dividend type of situation.



So dividends on insurance policies are a partial return of the premiums you paid. Don’t report them as dividends include them in income on Schedule One, line eight z only if they exceed total of all net premiums you paid for the contract.

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